Uncertainty around Solvency II is crippling investor confidence but regulation is still needed

Uncertainty around the proposed European framework for insurance regulation Solvency II is undermining investor confidence, Standard & Poor’s (S&P) warned in a report published yesterday.

It said that evolving regulations like Solvency II is also delaying the restructuring of business models and investment decisions.

The report, Q&A on the future of solvency II: pragmatism is likely to prevail reflects the views it expressed at a recent conference on Solvency II in Dublin.

It said: “The prospect of a prolonged period of low interest rates in the EU and fragile economies across the region are negative rating factors for several of the insurance companies we rate.

“The insurance companies most exposed to low interest rates and weak economic growth are life companies that provide guaranteed returns to policyholders. We have recently downgraded several of these companies, or have revised or kept the outlooks on their long-term ratings at negative.”

However despite its delay, Solvency II is still needed, the rating agency concluded. It said: “Solvency I is “virtually devoid of incentives for good risk management and lacks capital requirements for asset risk. The diverse forbearance measures that regulators are currently using illustrate the shortcomings of the current framework.”